Hearts & Minds Investments chair Chris Cuffe is hoping for the six-year-old fund, which gives 1.5 per cent of its assets to medical research charities each year, to grow to more than $1.5bn in the next five years.
In an interview with The Australian ahead of Friday’s Sohn conference in Adelaide, the veteran fund manager and philanthropist says he sees his role as growing the assets of the fund, now at $800m, after raising an initial $500m when it was listed on the ASX in November 2018.
The HM1 fund is an extension of the original Sohn Australia Hearts & Minds organisation, which runs an annual conference where attendees pay some $3500 to hear some of the world’s top fund managers tip stocks, with proceeds going to medical research charities. This year HM1 will give $12m to research charities in addition to the money raised by the conference.
“I view my role here as trying to grow this fund to be as large as possible, hopefully through good performance which we have seen recently,” says Cuffe. “The bigger the fund, the more we give away.”
HM1 is a unique high conviction global equity fund which holds 31 stocks.
It invests 35 per cent of its assets in the 10 stocks recommended by Sohn conference fund managers each year, which it holds for a maximum of 12 months, and the other 65 per cent in what it calls its core portfolio, chosen by seven selected fund managers who each pick three of their best stocks, and these can be held for a much longer duration.
HM1 was set up two years after the Australian version of the New York-based Sohn conference was launched in November 2016, as local organisers saw it as a way to turbocharge the money raised by the conference and its concept of raising funds for medical research, which originated in New York in the 1980s.
The Australian organisers decided to set up a listed investment company which would invest in the stocks tipped by the fund managers. The company now owns the Sohn Australia Hearts & Minds conference.
While the annual conference is the core to the Sohn concept, Cuffe says HM1 has become “the goliath in the room” when it comes to raising money, giving much more to the medical research charities from the fund.
“The conference was the original money making thing,” Cuffe recalls.
“We thought we could dial it up if we got a decent sized listed investment company to make it easier for people to buy the stocks picked by the Sohn conference fund managers.”
So far, the Sohn Australia conference organisation has donated $70m to medical research – with $54m coming from HM1 and $16m from the Sohn Hearts & Minds conferences over the years.
HM1 is now one of Australia’s top 30 corporate philanthropists.
The top 10 holdings in the fund’s long term core portfolio are Amazon, Block, Microsoft, Taiwan semiconductor giant TSMC, Guzman Y Gomez, Mastercard, Intercontinental Exchange, Formula One Group, and Opthea.
But it has not been plain sailing. After listing in November 2018, HM1’s share price rose to around $4.78 in early 2021.
But its shares, with a heavy exposure to global and tech stocks, were hit by the fall in markets during Covid which saw its profits fall and its share price slide to a low of $2.08 in mid-2022.
It recovered from $2.47 in January this year, but HM1 is still only trading at around $3.06.
The fall in earnings and share price prompted Cuffe and the HM1 team to revise their strategy, taking a much more active approach to managing the portfolio.
A key player in the turnaround has been chief investment officer Charlie Lanchester, a fund manager with 30 years experience, who stepped into the role in April last year after eight years with Blackrock.
His role includes actively watching the performance of stocks tipped at the conference and being prepared to take profits or sell out earlier than the 12 month holding period, including being prepared to take a loss if it looks like the scenario outlined by the fund manager who tipped the stock takes longer to play out than the 12 month holding period.
Lanchester also plays a role in selecting fund managers who present at the conference, liaising with them to make sure that there is a diversification in the stocks tipped at the conference, such as not having too much exposure to technology stocks. “Making sure we’ve got the best possible managers in the core portfolio is part of my job, as well as being part of the selection process for which fund managers present at the conference,” he says.
When managers of the core portfolio recommend a stock to buy, Lanchester challenges them, making sure they are looking ahead to how the stock could perform in the future, and are not just recommending one which has performed well in the past. Fund managers, he says, are often reluctant to sell favourite stocks.
Last year it also appointed two new core fund managers, Munro Partners and Tribeca Investment Partners. While most of the fund’s stocks are listed, it is allowed to own some private companies.
HM1 invested in Guzman y Gomez in January 2023, prior to its initial public offering, through its core portfolio, at a price equivalent to $16 per share.
The stock was subsequently tipped at the conference last November. The stock has since listed, providing HM1 with a return of 150 per cent. Other stocks which have done well for HM1 in the past have included some in last year’s stock picks including Telix Pharmaceuticals which was up 125 per cent in 12 months. It was tipped by IFM’s Ricki Bannan. Bed and Bath Works, tipped by Dan Loeb at Third Point, gained 55 per cent in two months. Unicredit rallied 38 per cent and was tipped by Martin Hughes from the Tosca Fund, while Ellerston’s Chris Kourtis tipped ResMed which rose 26 per cent.
The changes have seen an improvement in the fund’s performance with its portfolio up 32 per cent for the 12 months to October 31 this year. Despite the difficult time of 2021 and 2022, it has delivered an annualised pre-tax investment return of 10.7 per cent a year since inception.
Its share price is trading at a 12 per cent discount to portfolio market value, an improvement from the earlier 20 per cent. The fund has also paid fully franked dividends totalling 53c per share, or a fully franked dividend yield of 5.3 per cent a year.
While HM1 now gives the bulk of the money to the research charities, the conference still plays a key role in the Sohn concept. “The conference adds a little bit more to (the funds donated by HM1), but it is much smaller,” says Cuffe. “The listed investment company is the big give away.
“But the conference has a key role showcasing the medical research charities as well as the fund managers and their stock picks.
Cuffe says other Sohn conference organisations around the world “look at us with envy because the philanthropic model has been so much more effective. We have given way more money than would have been raised by just having the conference.”
The 10 stocks which will be pitched at the conference on Friday will go into the fund after they are announced. “We have sold out of last year’s stocks, and we are ready for the new stocks to come in,” Cuffe says.
This year’s Sohn Hearts & Minds will be hosted in Adelaide at the Festival Theatre. Themes include space, AI, geopolitics, biosciences and investing. It is being held in partnership with the South Australian government.
This article was originally posted by The Australian here.
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